Cryptocurrency Crash

These are dangerous markets!

One of the more profitable trades this year was in the cryptocurrency Bitcoin.

For those unfamiliar, Bitcoin is a digital asset and payment system — a virtual currency. It’s considered a cryptocurrency because it doesn’t require a central bank to handle its transactions. It’s all self-contained through technology that encrypts and records a ledger over a distributed computer system. This technology is called the blockchain.

The benefit of blockchain technology comes from its transparency. Everyone can see every transaction. The whole system is also decentralized. There’s no single institution or bank that controls the transferring of assets back and forth. This (advocates claim) removes the possibility of corruption, theft, and a whole host of other common problems that come with your standard financial system.

Bitcoin and its fellow cryptocurrencies (a number have been launched since) have become popular as alternatives to the standard fiat currencies of governments around the world. In some ways they’re treated in a similar way to gold and other precious metals. Don’t trust the government? Scared of inflation or other market problems? Then pile into these alternative currencies.

Our team at Macro Ops likes the idea of these virtual currencies. Their technology is impressive and can be used in a variety of different applications.

But the advocates of these currencies have come to the point of pushing fantasies. Their long-term goal is to create a system completely free of human intervention — with machines operating everything. In their minds, the humans are the problem and rigid automation is the solution to create a “perfect” system.

A large percentage of cryptocurrency investors believe in this vision to some extent. And this belief is part of what fuels massive speculative runs and subsequent crashes in the prices of these assets.

We saw this happen just recently in the Ethereum market, another cryptocurrency.

The story of the crash starts with the creation of a new “revolutionary” kind of venture capital firm — the Decentralized Autonomous Organization (DAO). Its goal? To be the first VC with no executives. Computers would manage everything.

The firm used Ethereum technology to run its operations. Investors would join the fund by submitting Ether, and once they bought in, they would receive voting rights in proportion to their investment. Companies that wanted to be funded by the VC would submit their proposals which all DAO investors would vote on. Whichever proposal won the voting round would be accepted and funded. All this was facilitated through Ethereum technology.

It was a decentralized, democratic system with full transparency — a brand new kind of investment firm. Investors considered it a beautiful extension of the technology that undermined cryptocurrencies. It excited them. And they piled in. DAO quickly raised $152 million from investors around the world.

But then the unthinkable happened. The fund was robbed. A hacker exposed weaknesses in DAO’s Ethereum construct and stole over $50 million.

The hacking successfully put an end to the DAO, and what’s more, it casted doubt on the security and durability of the entire Ethereum system. The beliefs of cryptocurrency investors took a beating. And that beating transferred to virtual currency prices. The price of Ether was nearly cut in half from the incident.

But soon after the DAO robbery, Ethereum developers were actually able to catch the hacker and freeze the funds he stole.

Great… problem solved right?

Nope.

This caused a giant debate to erupt among the Ethereum community. Returning the stolen money to investors would require a manual change to Ethereum’s underlying technology. This is a huge deal because it would require human intervention which would defeat the whole purpose of a completely autonomous system. It would ruin the sanctity of the currency and fly in the face of the principles it was built on. This made the decision a polarizing one. It’s ironic because the community is now stuck in political battle, just the kind they hate and created cryptocurrencies to avoid.

There’s a few lessons to be learned from this. One is in the need for regulation.

Cryptocurrency creators believed that a completely machine-based system wouldn’t need regulation liked standard banks. This would lead to fewer costs and far better efficiency, creating a new and improved financial system.

This is a nice sentiment. But in reality, regulation is necessary. Now we agree overregulation is bad, which is what much of the financial system is suffering from now, but zero regulation is just as dumb. To think cryptocurrencies could somehow avoid any type regulation is stupid. It goes back to cases of fraud and stolen assets. There needs to be rules in place so that the right people are prosecuted and victims compensated.

It’s funny because the cryptocurrency community is starting to realize this. They’re starting to see why the original banking system is there in the first place with all its rules. It turns out not all parts of the system are worthless and in need of “disruption”. Surprise, surprise…

We’ve now seen various members of the cryptocurrency community call for the SEC to step in, claiming that “the current “wild-west” environment presents dangerous pitfalls for potential investors, as the DAO attack has shown”.

Back to regulation we go…

The second lesson here is in the unrealistic expectations of investors causing booms and busts. A lot of the price run-ups in these virtual currencies have been due to investors’ beliefs in utopian fantasies of perfect financial systems without regulations. When beliefs stretch that far out into left field, any small trip up in the investment narrative (such as a system hack) will cause prices to come tumbling down.

This is why we’ve seen multiple large crashes in these cryptocurrencies in just the few years of their existence. These are dangerous markets and investors should be wary of getting involved. They may be a good investment in future, but now is not the time. It would be best for most investors to sit on the sidelines and wait for the numerous problems that come with the creation of a new currency to be solved before jumping in. By Alex M., Macro Ops.

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32 comments for “Cryptocurrency Crash”

Maurits G

Jun 30, 2016 at 7:50 am

It required a “manual intervention” but it HAS to be highlighted that this intervention happens in the opposite way to the way central banks do things. In our real world monetary system, a few/handful of “chosen bankster people” make decisions for the rest of the world. How much and who gets the money they create.

In Ethereum there were no bail ins, bail outs, no new Ether created, and most importantly the decision to freeze the hacker’s funds were made trough consensus. This is the way it works:
1. Someone came up with a plan (freeze the hackers funds), anyone can come up with an idea, but that does not make it reality and no 1 person or handful of chosen ones has the power to do this, so..
2. The entire Ethereum community voted/is voting if they want to run the Ethereum code with the “freeze funds tweak”, or without it. The voting is done by miners choosing which mining software to run and by the users by which chain they want to use.
This would be the same as having a banking crisis in ’08 and having the entire worlds population vote what should happen to the banks, banksters and central banks.
What do you think the implemented solution would have been?
Do we bail out/in the banks, saving a handful of rich people by all paying?
Or do you think we, 7 billion minus perhaps 300-500 people, would have said screw them and saving “us”?

I know which one I would have chosen.

Vooks

Jun 30, 2016 at 8:52 am

Point is, no system can be totally free of human intervention

Petunia

Jun 30, 2016 at 9:49 am

No system which is seen as unfair will survive as a transactional system. The only way to fix this is to steal the money back.

d'Cynic

Jun 30, 2016 at 11:45 am

Or just print those darn 50 mils, and the system will back to normal.

OutLookingIn

Jun 30, 2016 at 8:41 am

No matter which name its described under;
Fiat, notes, credit, loans, bills, digits, crypto, they are all currencies.

Currency that is called into being, out of nothing, based on faith.

For thousands and thousands of years there has been only ONE money.
GOLD and sometimes SILVER. Held in your hand. This is irrefutable.

ALL currencies contain third party risk. Risk of vanishing. Poof! Gone.
Whereas physical gold and/or silver held in your possession is…
Well, good as gold! Whats in your wallet?

Petunia

Jun 30, 2016 at 9:56 am

I understand your point of view being of a certain age and having been brought up by parents who lived through the depression. However, you are seriously underestimating the amount of comfort with technology of the younger generation. None of these young people would trade in their smart phones for a Rolex. They have no problem not having any money in their pockets and prefer to have it on a debit card or payment system. None of them would trade their credits for gold.

OutLookingIn

Jun 30, 2016 at 10:54 am

Very true. They will be the very first to have their “come to Jesus” moment, come true when their false reality fractures.
Case in point;
While at a large mall waiting for she who must be obeyed, enjoying a cup of exotic coffee at the food court, I observed a group of young teenage girls (6 or 7) sitting at one of the big round tables. All were silent and intently staring at their smart phones, while thumbs flew across the little screens.
Quite suddenly, all broke into gales of laughter, startling not only me but others close by. As quickly as the outburst occurred, it ceased and all were back head bowed, silently paying complete attention to their personal, little electronic world.

It struck me as being very strange indeed. Why come to a public place as a group to converse through an electronic intermediary, when they could have stayed home? Rather than gather socially, without being sociable! Very strange. Difficult to comprehend.

Ken

Jun 30, 2016 at 6:55 pm

They were snapping or slacking about the creepy guy staring at them;)

d'Cynic

Jun 30, 2016 at 12:46 pm

Your ideas go back centuries when you had to carry gold coins with you. That was impractical for many reasons:
1. Firstly, you need to “educate” the general population to accept a useless commodity for something useful, e.g. livestock (easy). Those who had excess resources always liked golden stuff like jewelry.
There is some moral hazard of emotional detachment from basic real life (easy), but you gain the freedom of selling today, and storing the value for later purchase, perhaps retirement, or inheritance.
2. Gold is heavy so you would have to carry quite a hanging sack with you.
3. Travelling with gold is dangerous and makes you a target for robbery as gold is anonymous: that who has it, owns it.
That’s why it was replaced by letters of credit, and eventually paper money, both backed by gold.
It is when you remove a finite, non-perishable commodity as the bedrock of the system that things change.
Not by necessity, as you can have prudent money management even in non-gold based system, IMHO, but the temptation is always there to try some financial alchemy. And you can apply your ideological biases, and woodoo theories.
That’s how I view the crypto currencies; the next step from central banking woodoo theories. If it just a low cost way to transfer funds, I am fine with it, but as a tool to effect human behavior on a large scale, doubtful.
That’s where we are today.

Agnes

Jun 30, 2016 at 5:39 pm

cf the real bills doctrine :)

nick kelly

Jun 30, 2016 at 7:27 pm

How many centuries back are we talking to get people to accept gold?
Of course if you are in the middle of nowhere, but Europe was quite urban by 1500. Gold coins were readily exchangeable for coins of cheaper metal like silver, which were accepted by merchants. So was gold but with reservations- you can’t walk into McDonalds with a thousand dollar bill.
They were coins not ingots but the latter would easily be converted by the money changer. Gold is impossible to counterfeit to any but a complete naive, because it is 1.5 times as heavy as lead.
I think only plutonium is heavier ( denser) and it was unobtainable then and is hard now.
(BTW: I have a serious buyer for plutonium, any amount, price within reason not an issue. Pls. contact through WS)

To be momentarily serious my mother had an English penny circa 1750. It was HUGE, even though it was I guess mostly copper it was a quarter of an inch thick and maybe 2 inches across. The point is that the metal itself had to have value. Even non-precious metal was valuable.

Re: the inconvenience of carrying gold because of weight- how much cash do you carry? An ounce of gold is worth around $1300.
This is about the size of a large stamp and about a 16 th of an inch thick.
The problem with gold as a day to day medium of exchange is
not its weight, it’s more getting units of weight small enough to be convenient. A tenth of a ounce is still $130, but we’re getting there.
I think it could be made feasible ( I’m not advocating this, I think) by
laminating the tenth oz leaf inside a transparent polymer, like our Canadian plastic money. The issuer, J&M etc. or a government could have its blessing, weight bla bla to the right, permitting easy inspection of the leaf. This encasing obviously presents more scope for a counterfeiter but it wouldn’t be easy.

And of course, let’s not forget seigneurage ( sp) this is the rough spelling of the legal right of a government or even an issuer to
put a face value on a minted item above the metal value.
In Canada you can have a private mint and you can put a face value on a coin, but you can’t put the Queen’s image or name.
A couple of guys were coining silver here on Vancouver Island for a while, and some of their stuff is collectible- one has a marijuana leaf on one side and a nude female on the other.

r cohn

Jun 30, 2016 at 9:04 am

ANY computerized system can be hacked .ANY

Vanisle500

Jun 30, 2016 at 12:33 pm

Taking things a bit further, the governments of all countries want to have control over the currency in circulation in their respective countries. It’s pretty easy to “throttle” access to any sites associated with cryptocurrency so what happens then? Also what happens if the power grid goes down? Physical gold and silver appear to be the ultimate safe haven.

Randy

Jul 2, 2016 at 1:44 am

FINALLY!! Someone else who recognizes the importance of plentiful amounts of electricity to run our society! Those girls all texting each other as they sit easily within an arm’s length, will have to revert to using their voice when the grids go down after the hyperinflation hits us square in the teeth! Oh my oh my! What a totally rude awakening it will be for them when the cell towers all shut down, the ATMs quit working and not even the gas station dispensers work any more!

It might not be found upon my certain and soon-to-be death, but it would not be stolen.

SnowieGeorgie

Petunia

Jun 30, 2016 at 9:45 am

This is one of the best articles on cryptocurrencies to date. The ability to get away with theft is the biggest weakness in the block chain. The transaction is there for all to see, but the transaction is irreversible. Why would anyone invest significantly in such a scheme. The temptation to steal is amplified when you allow the thief to keep the loot. Banking regulators, please take note.

Brian Richards

Jun 30, 2016 at 11:20 am

Petunia,
I agree wholeheartedly with both of your posts.

nick kelly

Jun 30, 2016 at 10:06 am

I don’t pretend to know a lot about this (!) although I expressed doubts about bitcoin a month before it was robbed.
Overall, this looks to me like an ingenious solution in search of a problem.
I would have to transfer millions to rack up fees equal to my liquor bill.

John S

Jun 30, 2016 at 11:13 am

That is the strength of cryptocurrencies, they decrease the cost of transferring money by several orders of magnitude. In essence they have the potential to eliminate expensive money transfer operators as well as replace banks for those functions. Over time the cost should trend close to the cost of energy used to make transactions, nothing more.

Not saying they are necessarily the future. On the other hand bloated banking sector that drains money and resources from rest of the economy is also hopefully not the future.

Petunia

Jun 30, 2016 at 11:21 am

While it is true that transaction costs are minimal, the real reason the banks like the block chain is the the irreversibility factor. They can pass on the liability of mistakes to the parties.

nick kelly

Jun 30, 2016 at 3:18 pm

How much money are you transferring that the fees are a major concern?
I think consumers need to worry more about credit card fees.

The person or most likely institution regularly moving large sums will I’m sure be able to negotiate fees a fraction of a percent.

John S

Jun 30, 2016 at 5:58 pm

You are forgetting about international remittances. Collectively these are huge amounts even though individual sums might be relatively small. Places like Money Gram and PayPal charge substantial fees.

This is one example. And yes, more sophisticated individuals with large amounts of money will handle this differently but a person sending $100 to Mexico every week saves $5 each time.

nick kelly

Jun 30, 2016 at 7:31 pm

Good point re:remittances. It’s not good when little guys pay freight like that.

NotSoSure

Jun 30, 2016 at 11:52 am

If humans are the problem, then who’s creating these? At the end of the day, it’s another “my stuff is better than yours”, “I am more trustworthy that you”, etc, etc, BS.

No human being has ever survived encounter with enormous power and/or money intact.

Intosh

Jun 30, 2016 at 12:55 pm

“Now we agree overregulation is bad, which is what much of the financial system is suffering from now”

And there I thought deregulation in the banking industry was the reason we saw the collapse in 2008…

NyteFox

Jun 30, 2016 at 1:57 pm

Often when any new significant technology comes along the debates often progress into an “either/or” conversation.

Crypto has got to a point where it isn’t going Anywhere yet it may not ever progress Somewhere. Meaning, all of the Early Adopters are buying in but they are still a small fraction of the mainstream. Even a large number of the Early Adopters only have a very small amount of crypto anyhow.

Furthermore, there is a battle being waged between the crypto camps of Bitcoin and Ether. Not to mention technical limitations…eg Bitcoin transaction times. (It shouldn’t take 10 minutes to pay for a cup of coffee.)

I really do like the previous comments about crypto being a solution looking for a problem. At this point that’s exactly what it is. Most of the general public aren’t going to start dumping fiat anytime soon–they perceive the current system in place isn’t perfect but better then any risky new fangled alternative.

That all said, the hour is early for crypto and the day is late for fiat. This will play out and if the crypto techs can manage to stay in the right place at the right time they’ll capture a healthy chunk of the upcoming market when fiat finally implodes.

shaba

Jun 30, 2016 at 5:50 pm

Bitcoin / Ethereum are really more complimentary than adversarial. ETh is a smart contract platform with its own scripting language while BTC is, currently, for transfer of value.

Sure, BTC has its transaction limits but it also has network security and hashpower akin to ‘200x Google’.

ETH has its own growing pains, the DAO fiasco being one. Forking (reverting) the chain of transactions to save investors money is a highly controversial move.

The BTC block size debate is poisonous but boils down to a supposed trade off between security and decentralisation. I am on the fence as to whether BTC should be a store of value or act more like a payment layer; I like the thought of it acting like digital gold but also would like the unbanked to not be priced out of being involved in a voluntary, unrestricted system (bitcoin uses no third party nor can transactions be regulated / denied)

Hopefully with SegWit coming online and the long proposed 2MB increase (after SegWit) along with Lightning Network (an ‘offchain’ payment channel) & RootStock proposals, bitcoin will continue its growth into the future.

Much like gold, I think it is a crisis asset for the tech generation that stands to benefit greatly from the folly of central bankers.

John S

Jun 30, 2016 at 6:19 pm

Crytopcurrency biggest problem in my opinion is that they strike directly at the source of power of the current government systems and elites that run it. The control of currency. I doubt they would willingly relinquish this power.

Cryptos through its rigid rules that are set at inception level the playing field, the rug can not be pulled under you by someone by changing laws or creating currency from nothing. In essence it is a system that reinforces meritocracy (for both good and bad as recent examples have demonstrated). This is the anathema to our current system where meritocracy has been banished and cronyism reigns supreme in which failures are washed away through inflation and capitol injections.

robt

Jun 30, 2016 at 2:42 pm

Bitcoin is a derivative of local money.
Local money must be transferred to an exchange to be convertied to BtC.
To obtain your local currency, you must convert back from BtC.
These exchanges are often in remote places, not places you can walk to.
The exchanges can simply ‘pull the plug’, and you have nothing, and probably no recourse, as we have seen many times in recent years. The image of someone who flew to Japan from Britain to stand outside a vacant office for weeks to no avail comes to mind.
Why bother? It’s mostly just a speculative vehicle, with the inherent risk of total loss of your funds. Yes, a somewhat limited number of people and businesses take Bitcoin in payment, but again, why bother? Use your credit card, obtain chargeback protection for a transaction if it’s unsatisfactory, and have up to 30 days to pay, interest free.
It’s traditional to hate the banks, and often for good reasons, but to me, Bitcoin is not a suitable vehicle of admonishment.
With Bitcoin, you also have to be constantly on the alert for fraud, usually with no resolution. Just check the forum on LocalBitcoins (https://localbitcoins.com/forums/).